SWOT Analysis: Gold Is Now 85 Times More Expensive Than Silver

Frank Holmes

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Monday, September 24th

Strengths

·The best performing metal this week was palladium, up 7.80 percent, scoring an eight-month high of $1,053.40 on Thursday, due to stockpiling by China, writes Kitco News. The World Gold Council reported this week that central banks added a net total of 193.3 tonnes of gold to their reserves in the first six months of 2018, representing an 8 percent increase from the same period in 2017 and the strongest first half of the year since 2015. The report notes that it is encouraging “to see several central banks utilize gold as an active asset to access liquidity or generate returns.” Russia, Turkey and Kazakhstan alone accounted for 86 percent of the central bank purchases for the time period.

·The Perth Mint Physical Gold ETF saw big inflows this week. Investors added a net $13.2 million into the fund on Tuesday, increasing the fund’s assets by 41 percent to reach its highest level since inception just over a month ago. Bloomberg writes that the ETF has attracted net inflows of $44.4 million since August 15.

·After several months of negotiations, labor groups representing more than 60 percent of workers at AngloGold Ashanti Ltd have signed a three-year wage deal with the major South African gold producer, reports Bloomberg. Negotiations between South Africa’s largest gold companies and labor unions began in July as producers are struggling to cut costs. The agreement between three unions and AngloGold is for a 6.5 percent pay raise for the first year and increases at the same rate or rate of inflation for each of the following two years. This is positive news for the South African gold industry, which has faced numerous challenges in recent years.

Weaknesses

·The worst performing metal this week was gold, still up 0.44 percent. Cobalt miners in the Democratic Republic of Congo are facing another round of bad news. The government is set to declare cobalt as a strategic metal, which will trigger a 10 percent royalty tax. This is far higher than the current 3.5 percent tax on cobalt produced in DRC and means a further cost increase for miners after a new mining code was implemented in June.

·Gold has continued to trade in the $1,200 per ounce range for the past month, even as assets fall in bullion-backed ETFs. The yellow metal has struggled to gain traction so far this year due to a stronger U.S. dollar. Ole Hansen, head of commodity strategy at Saxo Bank A/S, said that gold’s narrow trading range “does indicate that some underlying demand has begun to emerge, but in order for the price to progress to a point where short sellers begin to worry, it needs additional support from a combination of a weaker dollar and lower stocks.” Gold appears to be trading sideways as conflicting stories reported that the yellow metal was both up and down on the news of additional tariffs on Chinese imports to the U.S.

·Goldman Sachs released a report on Thursday revising its three-, six- and 12-month forecasts for gold that are all around $100 less than before. Kitco News reports that Goldman expects gold to be at $1,250 per ounce in the next three months and at $1,325 in one year. Although the group lowered its forecasts, it expects gold prices to gradually rise on the back of renewed emerging market demand.

Opportunities

·Gold is now around 85 times more expensive than silver per ounce as the gold/silver ratio hit a high not seen since 1995, according to Bloomberg data. Both precious metals have been falling so far in 2018 due to a stronger U.S. dollar, among other factors. ETF holdings backed by gold have fallen 1.3 percent this year, while those tracking silver have climbed 2.3 percent. Carsten Fritsch, an analyst at Commerzbank AG, told Bloomberg in a phone interview that “smart investors and long-term investors are seeing a lot of value in silver at these levels” and that “silver prices are low in both relative and absolute terms”. This rising ratio could attract more investors to silver.

·Gascoyne Resources released incredibly strong drill results near the Dalgaranga Gold Project in Western Australia. The company reported gold grades up to 1,450 grams per ton within an eight meter wide zone that has visible gold mineralization. Nighthawk Gold also reported strong drill results at its Colomac Gold Project in Canada with 16 of the 18 drill holes intersected with gold mineralization. Drill results include intersects of 84.30 meters of 2.91 grams per ton of gold and 24.55 meters of 5.05 grams per ton of gold. Lastly, Cardinal Resources said that it has a strong business case to move the preliminary feasibility study at the Namdini Gold Project in Ghana to being a definitive feasibility study after strong drill results.

·Ross Norman, CEO of Sharps Pixley, wrote this week that precious metals lease rates are tightening. Norman says that “just as buying and selling affects prices, borrowing and lending affect lease rates. If a market is undersupplied then it follows lease rates will rise, which can have a knock-on effect on prices.” Since precious metal markets are tightening, that could put pressure on large speculative short positions in gold and silver, which could lead to higher prices.

Threats

·Chile’s congress is reviewing a proposal for an additional royalty payment for copper and lithium miners operating in the country as a way to bolster the development of the regions around miners and deposits. The initiative proposes a 3 percent tax on the nominal value of extracted metals and would apply to copper miners producing more than 12,000 tons of the red metal a year and 50,000 tons of lithium. Chile is the world’s top producer of copper.

·The government of India is attempting to curb gold imports in an effort to check the fall in the rupee’s value and control its current account deficit, writes the Press Trust of India. Reports show they will attempt to use policy changes to curb imports, rather than raising customs duties, which can lead to an increase in smuggling activities. India saw gold imports jump by 93 percent in August, with demand expected to continue rising as the wedding season and Diwali celebrations near. The rupee has fallen around 6 percent since August and India’s trade deficit hit a near five-year high in July.

·Bloomberg reports that companies repatriated $169.5 billion to the U.S. in the second quarter of this year, according to data from the Commerce Department, up from $34.9 billion a year earlier. This could lead to a stronger dollar, if the money wasn’t already held in dollars. A stronger dollar historically is a headwind for the price of gold. More repatriations are expected as the tax overhaul signed into law by President Trump in December gives companies incentives to bring money back to the U.S. by lowering the tax rate to just 15 percent, down from 35 percent.

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